South Africa plans to sell its debut international sukuk this year and introduce two long-term domestic bonds as the nation diversifies its debt portfolio to reduce refinancing risks, the National Treasury said.
Africa’s biggest economy is close to finalising the regulatory framework for the planned $500mn of Shariah- compliant bonds, Thuto Shomang, head of assets and liabilities at the Treasury, said in an interview. The issue is intended to set a benchmark enabling state-owned companies, including power utility Eskom Holdings SOC, to tap sukuk markets, he said.
“The appetite is there, the investor base is there,” Shomang said. “We’ll be offering investors a different credit. It is an opportunity to get exposure to South Africa.”
South Africa has to refinance 154.9bn rand ($14bn) of debt over the next three years at a time when bond yields are climbing as the Federal Reserve tapers monetary stimulus and emerging-market central banks boost interest rates to protect their currencies and combat inflation.
The rand fell 3% against the dollar this year, the worst among 16 major currencies tracked by Bloomberg after Canada’s dollar.
South Africa’s total debt will climb more than projected in the mid-term budget in October, peaking in 2017 at 48.3% of gross domestic product as higher yields boost borrowing costs, the Treasury said in the 2014 Budget Review submitted to lawmakers in Cape Town. Yields on rand debt due December 2026 rose 30 basis points this year to 8.55% by 3:59 p m in Johannesburg.
“South Africa’s borrowing strategy is sufficiently responsive to withstand long-term adjustments in global and domestic capital allocations and short-term market shocks,” the Treasury said. “Debt levels remain sustainable. South Africa’s debt has a long maturity structure and its exposure to foreign currency liabilities remains low, reducing the impact of global volatility.”
South Africa has been considering a sukuk since 2011, when it appointed Standard Bank Group, BNP Paribas SA and Albaraka Banking Group to advise it on the transaction. Nova Capital Partners LLC, Liquidity Management House for Investment Co and Regiments Capital (Pty) Ltd were also appointed. Global Islamic finance industry assets are poised to more than double to $2.7tn by 2017, according to PricewaterhouseCoopers LLP. Islamic bond sales may match a 2012 record this year, Fitch Ratings said in a report in January.
Delays in amending Treasury regulations and identifying an asset to back the bonds held up South Africa’s sale. Eskom, Transnet SOC, the rail and ports operator, and Trans- Caledon Tunnel Authority SOC, a builder of dams and water tunnels, are among companies weighing sukuk issuance.
The Treasury plans to raise $1.5bn a year in foreign debt markets over the next three years, including the sukuk, Shomang said. “If we do the sukuk first, it will allow us the flexibility in terms of other foreign issuance,” he said.
Domestic bond sales are set to decline over the next two fiscal years as the budget deficit narrows, reducing the government’s borrowing needs, the Treasury said. Gross domestic borrowing will decline to 167.1bn rand in fiscal 2015 from 170.6bn rand this year. It will fall to 165.1bn rand in fiscal 2016, before rising to 180.6bn the following year as debt redemptions increase, according to the Treasury.
The programme of swapping short-term debt for longer-dated securities, known as switch auctions will continue, and the Treasury may also tap export-credit agencies to finance projects with large foreign-exchange commitments, it said.
In addition to two new rand bonds maturing in 2032 and 2044, the government plans to introduce a “top-up” security for retail investors, which allows regular deposits into existing investments, as well as an Islamic-finance compliant rand bond for small investors. So-called retail bonds raised 3bn rand in the fiscal year through March.
Weekly government auctions will be “broadly maintained” at current levels over the next year, while switch auctions will be held when market conditions allow, rather than at regularly scheduled intervals, the Treasury said. Pre-set targets for switch auctions will be dropped to “limit price manipulation and resulting market volatility,” it said.
The government is adopting new risk benchmarks for its debt portfolio, placing lower limits on the proportion of inflation- linked debt, foreign-currency bonds and short-term securities. Inflation-linked securities will be limited to 25% of total debt from 35% now, while notes maturing in less than five years will be capped at 25%.